The sad history of paper money

July 24th, 2008

The sad history of paper money is that it is printed until it is worthless. This is to say that whenever paper currencies are de-linked from gold or silver (made no longer redeemable in gold or silver), politicians print those currencies until they are worthless.

The most infamous destruction of a paper currency occurred in post World War I Germany. The Germans had lost the war, and the French demanded reparations. Coupled with the costs of reconstruction, Germany turned to the printing presses.

The French, ironically, had their own sad encounter with paper money during the French Revolution (1789 – 1799), which was eloquently documented by Andrew Dickson White, cofounder of Cornel University, is his Fiat Money Inflation in France.

The French currency of the time was the assignat. White’s account tells how members of the French Assembly rose and called for the printing of more assignats with every slowdown in the economy. In the end, just as would be the case in Germany 1923-1924, hyperinflation destroyed the currency.

Politicians always have what they consider good reasons for the printing of more paper money, regardless of the inevitable consequences. Of course, they rationalize that “Just this one time, it is necessary.” Later comes another time.

Going from memory, I can think of a few of those times. There was the Russian crisis in late 1980s, followed by the Mexican crisis in the early 1990s, followed by the Asian crisis. Then there was the slow down in the economy, which prompted Alan Greenspan to lower the Fed’s discount rate to 1%.

Greenspan’s hammering of interest rates helped bring on the housing boom, which turned into the housing bust, which gave us the Fannie Mae/Freddy Mac debacle. Now, Congress has instructed the Fed and the Treasury to work together for the creation of still more fiat paper money.

Ron Paul, who needs no introduction to gold/silver investors, gives an excellent analysis of the Fanny Mae/Freddy Mac bailout legislation that will allow the Fed and the Treasury to commence printing. Paul prepared his comments in video form. The video, which can be found on goldseek.com, is only 7-1/2 minutes. Note that below the video is the printed summary of the bill.

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